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CISG CASE PRESENTATION

China September 2006 CIETAC Arbitration proceeding (Printing machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060900c3.html]

Primary source(s) of information for case presentation: Case text

Case Table of Contents


Case identification

DATE OF DECISION: 20060900 (September 2006)

JURISDICTION: Arbitration ; China

TRIBUNAL: China International Economic and Trade Arbitration Commission [CIETAC] (PRC)

JUDGE(S): Unavailable

DATABASE ASSIGNED DOCKET NUMBER: CISG/2006/10

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (claimant)

BUYER'S COUNTRY: People's Republic of China (respondent)

GOODS INVOLVED: Printing machine


Classification of issues present

APPLICATION OF CISG: The contract states: "The applicable law is the law of the People's Republic of China and may also refer to the United Nations Convention on Contracts for International Sales of Goods (CISG) and international trade customs."

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 71 ; 80

Classification of issues using UNCITRAL classification code numbers:

71A [Suspension of performance: grounds for suspension];

80A [Failure of performance caused by other party (party causing non-performance: loss of rights]

Descriptors: Suspension of performance ; Failure of performance, other partyt

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Chinese): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

China International Economic & Trade Arbitration Commission
CIETAC (PRC) Arbitration Award

Printing machine case (September 2006)

Translation [*] by Zheng Xie [**]

Edited by Wang Minna [***]

Particulars of the proceeding
Position of the parties
Opinion of the Arbitration Tribunal
Award

PARTICULARS OF THE PROCEEDING

The China International Economic and Trade Arbitration Commission (hereafter, the "Arbitration Commission") accepted the case (Case number: M2006___) according to:

   -    The arbitration clause in Contract No. A02-0235 (the "Contract") signed by
Claimant [Seller], ___ Inc. [believed to be of Germany], and
Respondent [Buyer], ___ Printing Company [of the People's Republic of China]
on 26 April 2004; and
 
   -    The written arbitration application submitted by the [Seller] on 27 January 2006.

The Arbitration Rules of the Arbitration Commission [hereafter, the "Arbitration Rules"], which took effect on 1 May 2005, apply to this case.

On 27 February 2006, the Secretariat of the Arbitration Commission by express mail sent the Arbitration Notice, the Arbitration Rules, and the Arbitrators List to both parties, and also sent the [Seller]'s arbitration application and evidentiary material to the [Buyer].

The [Seller] appointed Mr. ___ as arbitrator, and the [Buyer] appointed Mr. ___ as arbitrator. Because the parties did not jointly appoint a Presiding Arbitrator or authorize the Chairman of the Arbitration Commission to appoint one within the time limit, the Chairman appointed Mr. ___ as the Presiding Arbitrator pursuant to Article 22(4) of the Arbitration Rules. The aforementioned three arbitrators formed the Arbitration Tribunal on 28 April 2006 to hear this case. On the same day, the Secretariat sent the parties by EMS Notice of the Formation of the Arbitration Tribunal.

On 27 March 2007, the [Buyer] submitted a counterclaim to the Arbitration Commission. Thereafter, the [Buyer] prepaid the arbitration fee for the counterclaim. The Arbitration Tribunal accepted the [Buyer]'s counterclaim, and decided to hear the counterclaim together with the [Seller]'s claim.

After reviewing documents and consulting with the Secretariat, the Arbitration Tribunal decided to hold a hearing on 25 May 2006 in Beijing. On 28 April 2006, the Secretariat sent by EMS the Notice of Hearing to the parties.

On 25 May 2006, the Arbitration Tribunal held the hearing. Both parties' representatives were present. They made presentation on the facts and legal issues, , examined the evidence, and answered questions from the Arbitration Tribunal.

After the hearing, both parties submitted supplementary written documents and the Secretariat forwarded those documents to the other party.

This case has finished all of its proceedings. Based on the facts verified in the court session and all written material, the Arbitration Tribunal entered this award jointly.

POSITION OF THE PARTIES

The [Seller]'s position

On 26 April 2004, the [Seller] and the [Buyer] entered into a Contract stipulating the equipment specifications, contract price, payment terms, liability for breach, etc. On 26 April 2004, the parties signed an Amendment to the Contract to change the contract price to 1,150,000 Euro.

After signing the Contract, the parties changed the date of the letter of credit and the shipping date. On 28 November 2004, the [Seller] shipped the machine to the [Buyer]'s place, installed and adjusted the machine on 25 August 2005, with the machine running normally. Then the parties signed a Service Report. Hence, the [Seller] performed its duties under the Contract.

   -    Article 6 of the Contract stipulates that "the buyer shall pay 5% of the contract price immediately after the Service Contract is signed." However, the [Buyer] failed to pay the balance, i.e., 57,500 Euro, constituting a breach of the Contract.
 
   -    Pursuant to Article 107 of the Contract Law of the People's Republic of China which states that "[w]here one party to a contract fails to perform the contract obligations or its performance fails to satisfy the terms of the contract, it is obliged to continue with its performance under the contract, to take remedial measures, or to compensate for losses," the [Buyer] should pay the balance and liquidated damages for the delayed payment.
 
   -    According to the Supreme People's Court's Response to How to Compute Liquidated Damages for Delayed Payment, if the parties do not stipulate liquidated damages for delayed payment, the Court may refer to the China People's Bank's standard for financial institutions to compute interest on delayed payments of loan. According to this standard, the [Buyer] should pay liquidated damages in the amount of 3,719 Euro (57500 Euro * 0.00021 * 308 days).
 
   -    In addition, pursuant to Article 25 of the Arbitration Rules, the Arbitration Tribunal may rule that the losing party shall compensate the winning party for any reasonable expenses incurred for the case, but this shall not exceed 10% of the amount awarded to the winning party. The [Buyer] should compensate the [Seller] for attorneys' fees, inspection fees, traveling expenses, communication fees, etc., totaling RMB 59,382.43 (equal to 6,121.91 Euro).

The [Seller] prays for the following relief:

  1. The [Buyer] should pay the [Seller] the balance of the contract price, i.e., 57,500 Euro, and should also pay liquidated damages accrued from 25 February 2005 to the date when the payment is made, at the rate that the People's Bank of China stipulates for delayed payment of loan at the same time, i.e., 2.1/10,000, and the liquidated damages are 3,719.10 Euro as of 25 December 2005. Therefore, the [Buyer] should pay the total amount of 6,121.91 Euro;

  2. The [Buyer] should compensate the [Seller] for reasonable expenses in the amount of RMB 59,382.43 (i.e., 10% of 61,219.10 Euro), which were incurred for the present case, equaling 6,121.91 Euro (at the exchange rate of 9.7 : 1 ),

    The total amount of the above Items 1 and 2 is 67,340 Euro;

  3. The [Buyer] should bear the arbitration fees.

The [Buyer]'s position alleged in its counterclaim submitted on 10 March 2006

The Contract stipulates that:

   -    The [Buyer] will purchase a CD102-5 five-color printing machine;
   -    The shipping date is 15 September 2004;
   -    The Contract warranty period is twelve months starting from 25 February 2005.

The parties' rights and obligations are stipulated in the Contract.

Since the [Seller] failed to deliver the machine within the stipulated time limit, the parties signed a Memorandum on 25 October 2005 stating that the [Seller] will deliver 15 UV rollers, and also immediately pay a penalty of 6,900 Euro to the [Buyer]. However, the [Seller] did not pay immediately.

During the warranty period, the following technical problems occurred frequently:

1.  The pre-set running system cannot run automatically;
2.  The paper feeding system cannot run automatically;
3.  The fourth color set leaks;
4.  The 1, 7, 11, 20 addresses of the fifth color set cannot run or cannot run normally;
5.  The roller cannot run normally (oil ink box lacks water);
6.  All color rollers have been discovered as once stoping running;
7.  Ultrasonic inspection (double-sheets inspection) system has defects, and two or three pieces of paper may go through together;
8.  There is only one gauge; the other two are missing;
9.  The three ultra-violet ray bulbs are broken.

Since August 2001, the [Seller] failed to perform its warranty duty. As a result, the machine purchased by the [Buyer] could not be used for normal production, thus causing the [Buyer] to incur severe loss such as labor costs and loss of operation. By telephone and f acimileshe [Buyer] notified the [Seller] of the quality defects, service problems and the fact that the [Seller] unauthorizedly cancelled the warranty service. Especially on 9 February 2006, the [Buyer] sent a fax to the [Seller] requesting it to replace the three broken ultra-violet ray bulbs. Although the [Seller] sent its staff to the site to inspect the machine, and reported the situation to its supervisor, the [Seller] did not give the [Buyer] any response, leaving the machine unrepaired and it could not be used properly, Thereafter, the [Buyer]'s in-house counsel sent a letter to the [Seller] requesting [Seller] to perform its warranty duty and to repair the machine immediately. The counsel also repeated the [Buyer]'s request via telephone to the [Seller]'s Shanghai post-sales service office manager and contact person. However, the [Seller] still failed to perform its duty of warranty service.

The [Buyer] counter requests:

1.  The [Seller] should continue to perform its duty of warranty for six months, and fix the machine immediately, and replace the defective parts (including those described above from 1-8);
 
2.  The [Seller] should compensate the [Buyer] for damages in the amount of 44,574 Euro (computed based on the same time bank loan rate) which were caused by the [Seller]'s stoppage of warranty service;
 
3.  The [Seller] should deliver fifteen UV rollers to the [Buyer], and should pay a penalty in the amount of 6,900 Euro for delayed delivery;
 
4.  The [Seller] should compensate the [Buyer] for expenses in the amount of 5,100 Euro reasonably incurred for this case;
 
5.  The [Seller] should bear the arbitration fee.

On 5 June 2006 the [Buyer] submitted the following Petition to Change its Counterclaims and to Change Request 9 of Item 1:

The [Seller] should compensate the [Buyer] for expenses of RMB 105,100 incurred to replace the three broken ultra-violet ray bulbs.

[Seller]'s response

On 6 June 2006 the [Seller] submitted the following response::

(1) The [Buyer] breached the Contract, and refused to pay the balance of the contract price without any factual or legal basis, and should be held liable for the breach.

According to the Contract, the [Buyer] should pay 5% of the contract price immediately after the parties signed the Service Report. The [Seller] delivered the machine to the [Buyer] in accordance to the Contract, and adjusted and tested the machine, and the machine runs normally. The [Buyer] signed the Service Report. Therefore, the [Buyer]'s refusal to pay the balance constitutes a breach of the Contract, and [Buyer] should be held liable for the breach.

(2) The [Seller]'s delivery was not delayed; therefore, [Seller] should not be held liable to pay a penalty for delayed delivery.

First, the [Seller] prepared the machine and decided the loading and shipping time according to the time when the [Buyer] placed the order. The time of the letter of credit which was submitted by the [Seller] to the [Buyer] indicates that after signing the Contract, since the [Buyer] could not issue a letter of credit before 29 April 2004 as stipulated in the Contract, the parties negotiated and agreed to postponed the issuance of the L/C, with,delivery postponed accordingly. Pursuant to Article 10(1) of the Contract, if the letter of credit is not issued on time or is changed, the buyer shall bear all expenses and loss incurred thereby including but not limited to interest and warehouse charges. In the present case, since the [Buyer] postponed the issuance of the L/C and corresponding delivery the [Seller] should not be liable for the delayed delivery.

Second, even if the [Seller] delayed delivering the goods, the [Buyer] has already lost the right to claim damages. Although the United Nations Convention on Contracts for International Sales of Goods (hereafter the "CISG") does not prescribe the time to claim regarding the seller's delay of delivery, the Hamburg Rules prescribe the time limit and validity of claims. They provide that the buyer shall notify the seller of delay of delivery within 60 days after the goods are delivered, and shall claim damages within one year since. Accordingly, the [Buyer] has lost its right to claim damages.

Third, the entire process indicates that it is unreasonable for the [Buyer] to claim damages. Suppose the [Seller]'s delivery was delayed, which occurred on 15 September 2004, the [Buyer] has not claim damages for delay of delivery, even when the [Seller] sent a demand letter to the [Buyer] on 13 September 2005. The facts indicate that even the [Buyer] itself admits that the delay of delivery was caused by the delayed issuance of the L/C. In addition, the parties have reached an agreement regarding this issue.

Fourth, the Memorandum signed by the parties may not be admitted as valid evidence. First of all from the legal perspective, evidence consists of facts which can prove truth. However, from its form and contents, the Memorandum is only a compromise regarding the payment of balance, therefore it cannot prove the facts in dispute in the instant case. As a result, the Memorandum cannot prove what happened originally, but only indicates a compromise between the parties, thus lacking a basic element of evidence, i.e., objective truthfulness, and cannot be admitted as evidence; secondly, if the Memorandum can be admitted as evidence, all disputes may be resolved pursuant to the Memorandum; however, the parties have disputes over the Memorandum, and therefore, other facts must be submitted to verify the original facts of this case and clarify rights and obligations for each side.

Finally, pursuant to Article 67 of the Evidence Rules in Civil Procedure enacted by the Supreme People's Court, in a litigation, any facts admitted in a settlement negotiation in order to reach a settlement agreement may not be admitted as evidence. Therefore, the Memorandum may not be admitted as evidence in the present case.

(3) The [Seller] delivered the goods and provided warranty services in accordance with the Contract. However, the [Buyer] refused to pay the balance when the machine was running normally. Therefore, it breached the Contract and should be held liable. The [Seller] is not liable.

First, the [Seller] performed its duty under the Contract on 13 January 2005, and the [Buyer] refused to pay the balance. Even under such circumstances, the [Seller] still performed its duty of warranty services until 11 August 2005, when the machine was running normally. Because the [Buyer] failed to pay the balance, on 1 September 2005, the [Seller] sent a demand letter to the [Buyer] requesting it to pay the balance, and the [Buyer] requested the [Seller] to deliver an additional 15 rollers for free, and to compensate it for some amount in Euros after payment. In order to resolve the problem, the [Seller] accepted the [Buyer]'s requests, and demanded that [Buyer] pay the balance. However, the [Buyer] failed to pay the balance, and the [Seller] commenced the arbitration. The [Buyer] should be held liable.

Second, the machine which the [Seller] delivered complies with the Contract. Since 15 August 2005, the [Buyer] has not requested the [Seller] to provide warranty service. There is no evidence demonstrating that the machine has quality defects. As to the [Buyer]'s request, on 11 August 2005, the [Seller]'s employee went to the [Buyer]'s site to provide warranty services, since then the [Buyer] had not requested the [Seller] to provide warranty services until the arbitration proceeding was commenced. Therefore, the machine delivered by the [Seller] is in compliance with the Contract with no quality defects. Even in the hearing, the [Buyer] also admitted that the machine has been running in good condition. The [Buyer] submitted a demand letter to ship the goods, five copies of facsimiles, photos and invoices of purchasing ultra-violet ray bulbs as evidence. Since the [Seller] has never received the aforementioned documents, their authenticity cannot be proved; therefore they should not be admitted as evidence, failing to prove the so-called quality defects and the incurred loss.

As to the witness' affidavit, it also cannot be regarded as valid evidence. The [Buyer]'s witness is its employee -- he is controlled by the [Buyer] and falls within the scope of "interested person." Therefore, his affidavit cannot be admitted as evidence. As to the record evidence submitted by the [Buyer], it does not prove that the [Seller] breached the Contract; on the contrary, it proves the fact that the [Buyer] failed to pay the balance.

Therefore, the [Seller] request the Tribunal to dismiss the [Buyer]'s counterclaim.

Thereafter, the [Seller] submitted the following supplementary opinion:

(1) Contrary to [Buyer]'s assertion, Service Report No. 6 indicates that the machine delivered by the [Seller] reached the quality requirements, and that the UV machine has no defects; otherwise, why did not the [Buyer] raise any objection to the quality of the machine. In addition, the machine has been running normally since 13 January 2005, and there is no evidence to prove that the UV machine has quality defects; the [Buyer]'s Evidence 14, i.e., Purchasing Ultra-Violet Bulb Invoice, also demonstrates that the machine has passed test and adjustment. If the invoice is true, the purchase occurred after the warranty period expired.

(2) With respect to the [Seller]'s Warranty Services described in [Seller]'s Website, this evidence is not related to the present case. First, the webpage is an advertisement, i.e., an invitation to offer, stipulating that different forms of contract shall belong to different machines, and that the period of warranty services shall be further agreed on. Therefore, the invitation to offer cannot be deemed as an obligation under the contract. In addition, the advertisement is aimed to those customers who comply with and perform contracts; however, the [Buyer] breached the Contract; even if the machine really has the problems as the [Buyer] alleged, the [Seller] is entitled to assert defenses. As to the [Buyer]'s request for warranty services, the [Seller] duly performed its duty of warranty service. Since the [Seller] sent the demand letter to the [Buyer], the machine has been running normally, and the [Buyer] has not requested warranty services from the [Seller]. These facts indicate that the machine has been running normally at least until 11 August 2005. According to the Contract, the warranty period is one year, and it is obvious that the warranty period has expired. Therefore, the [Buyer]'s request to prolong the warranty period is not reasonable. In addition, the warranty scope includes the quality of machine and parts, but excludes any damages of parts caused by inappropriate operation.

(3) Whenever it received a request from the [Buyer] for maintenance -- from the installation to August 2005 -- the [Seller] has performed its duty appropriately in accordance with the Contract. In addition, the Service Report indicates that the [Seller] has already performed its duty of warranty service, and the [Buyer] has executed the Service Report and admitted the [Seller]'s performance.

(4) As to the Ultra-Violet Bulb Invoice, it was issued on 3 March 2006. If the [Buyer] purchased the bulb for the machine, the Service Report indicates that the warranty period expired on 25 February 2006, and the time when the bulb was broken on 3 March 2006 is beyond the warranty period. In addition, there is no evidence proving that the bulbs were purchased for this machine, and nor can it prove that the machine of the present case has defects.

[Buyer]'s supplementary opinion

Thereafter, the [Buyer] submitted the following supplementary opinion.

(1) The delayed delivery

Article 5 of the Contract states: "Shipping Time: Before 15 September 2004."

Article 10(2) of the Contract states: "If the seller fails to deliver the goods on time, except for force majeure stipulated in Article 11, the seller shall obtain the buyer's approval for delay of delivery with the precondition, to pay a penalty to the buyer. The penalty shall be 0.2% per ten days (computed as ten days if the delayed days are less than ten days), but shall not exceed 5% of the total value of delayed delivered goods."

After signing the Contract, the [Seller] could not ship the goods on time because the manufacturer delayed delivering the goods; the [Seller] through Wenzhou Import and Export Company notified the [Buyer] and requested to change L/C as follows:

   -    Change "Latest date of shipment: 040915" to "Latest date of shipment: 041010"; and
 
   -    Change "If the seller cannot ship the goods before 30 September 2004" to "Latest date of shipment: 041015".

The [Buyer] via facsimiles agreed to change the letter of credit, and requested the [Seller] to ship the goods as soon as possible, and clarified that the [Seller] shall bear all expenses incurred thereof. According to the Contract, the [Seller] shall pay a penalty in the amount of 6,900 Euro.

In sum, the [Buyer] changed the letter of credit because the [Seller] requested a delay in delivering the goods. The fact that the [Seller] delayed delivering the goods is clear and proved by sufficient evidence. Meanwhile, the [Seller] failed to pay the penalty; therefore, it is the [Seller] who breached the Contract first.

(2) The machine delivered by the [Seller] has not been running normally, and the [Seller] failed to resolve the problem.

According to the Contract, the [Buyer] purchased the machine, and the [Seller] was obligated to provide free warranty service within the warranty period. The free post-sale service within the warranty period is the [Seller]'s contingent duty. In order to prove that the [Seller] promised to provide post-sale service, the [Buyer] downloaded the documents prescribing all warranty services for customers from the [Seller]'s website, which states:

"[Seller]'s warranty services not only include maintenance and inspection, but also include repair of any problems. [Seller] will bear traveling expenses for its engineers and costs of parts."

The machine has not been running normally since the [Buyer] purchased it. The [Seller]'s engineers failed to fix the problem.

First, Service Reports No. 002655 and No. 002654 indicate that these reports were issued on 13 January 2005. Since the [Seller]'s engineer stated that it was close to lunar New Year, and he was going home, the engineer did not complete adjusting the machine, but promised to complete adjusting the machine after the lunar New Year, and the warranty period was prolonged and computed from 25 February 2005, i.e., lunar January 17. (according to the Contract, the warranty period and 5% balance payment period started from 13 January 2005 when the Service Reports were signed). After the lunar New Year of 2005, the [Buyer] via telephone notified the [Seller] and awaited the [Seller]'s engineer to adjust the UB machine in order to clear the balance, i.e., 5% of the contract price. However, the [Seller] did not send any person to adjust the UV machine. This fact is proved by the Service Reports submitted by the parties. It is untrue for the [Seller] to allege that the [Buyer] has not notified it of adjustment until the hearing.

Second, the fax submitted by the [Buyer] indicates that the fax of 22 June 2005 states that the paper receiving glass of the machine is broken, and on 1 May 2005, the [Seller]'s engineer inspected the machine on site and promised to replace the broken parts on or around 20 May 2005. However, the [Seller] did not replace the broken parts until 22 June 2005, which indicates that the [Seller] failed to perform its duty as promised.

The faxes sent from 29 June 2005 to 30 June 2005 indicate that the machine has had problems since it was installed on 28 November 2004. Although the [Buyer] sent many demands and the [Seller] sent engineers for adjustment, the problem has never been solved. On 29 June 2005, the [Seller] found that ninety-five rollers of the five color sets were broken. According to the inspection taken by the [Seller]'s engineer, 29 rollers were completely broken and could not be used any longer.

Service Report No. 501191 dated 6 July 2005 states: "The first set has been replaced with a roller, we hope you can resolve the problem as soon as possible." This Report indicates that the first set roller was replaced on 6 July 2005; the other four sets have not been replaced. In the Service Report, the [Buyer] hoped that the [Seller] could resolve the problem as soon as possible, but the [Seller] failed to resolve the problem promptly. After several negotiations between the parties, the [Seller] drafted a Memorandum on 25 October 2005 stating:

"After the parties' negotiation, an agreement was reached to resolve the problem under Contract No. A02-0235. The buyer shall pay 5% of the contract price, and after receiving the payment, the seller agrees to send 15 rollers to the buyer for free."

The [Seller] also orally clarified to the [Buyer] that in order to protect the company's reputation, it did not state "as compensation" but "for free." The [Buyer] requested the [Seller] to pay the penalty of 6,900 Euro after signing the Memorandum. However, the [Seller] failed to perform its promise, and did not pay the penalty, nor did it resolve the problems with the other four sets of rollers.

(3) The fact that the [Seller] stopped providing warranty service from August 2008 is obvious and proved by sufficient evidence. The [Seller] violated basic business principles and breached the Contract. According to the [Seller]'s promise to its customers, the [Seller] should continue providing free warranty services for six months, and should also compensate the [Buyer] for any loss incurred because the machine cannot run normally.

The [Seller] admitted that it has not adjusted and repaired the machine since 5 August 2005. However, the [Seller] alleged in the hearing that the [Buyer] has not requested the [Seller] to provide warranty services. The fax of 19 November 2005 (it was also sent by express mail to the [Seller] (See Evidence 16: the express mails of 19 November list) ) demonstrates that the [Seller] unilaterally stopped warranty services, and although the [Buyer] requested the [Seller] to adjust and repair the machine several times by telephone, the [Seller] ignored the [Buyer]'s requests. The [Buyer] is not satisfied with the [Seller]'s stoppage of warranty services as retaliatory action.

The fax of 9 February 2006 demonstrates that the [Buyer] requested the [Seller] to fix the problems with ultra violet bulbs of the machine. On 10 February 2006, the [Seller] sent some staff for repair. However, not only did the [Seller]'s staff fail to repair the two broken bulbs, but also broke a third bulb which caused more problems. Therefore, the [Buyer] had no choice but to purchase the ultra-violet bulbs from a third party for RMB 105,100. The photo of broken ultra-violet bulbs is found in Evidence 11.

The demand letter and appendix (see Evidence 12) indicate that the [Buyer] requested the [Seller] to provide warranty services at another time, and to fix the problems and replace the broken parts, and also requested the [Seller] to continue to provide warranty services after the six-month stoppage of the warranty services (the demand letter was sent during the warranty period). The record evidence is consistent with the demand letter, both demonstrating that the reason that the [Seller] has not provided warranty services since August 2005 is due to the [Buyer]'s failure to pay the 5% balance, not due to the [Buyer]'s failure to request warranty services as the [Seller] alleged in the hearing. This fact is proved by the last Service Report, No. 2 of which states, "No. 9, 10 and 12 rollers have defects, and the damages may be triple." When this Service Report was filed, the machine still had problems, and the [Buyer] claimed damages.

All above evidence is consistent with witness Mr.___'s affidavit.

In sum, the machine delivered by the [Seller] has never been running right since it was installed.

Notes: The maximum speed of the machine is 15,200 copies/hour. The machine can print 100,000 to 130,000 copies per hour when it is running normally. If the machine works for eight hours per day, it can print 800,000 to 104,000 copies per day, and 2,400,000 to 3,120,000 per month. However, the machine has printed 2,620,000 copies since 5 August 2005, which equals to the amount when the machine is under normal condition. . The Contract stipulates that the [Seller] shall provide one-year warranty services and guarantee that the machine runs normally. Since the [Buyer] purchased one-year free warranty service when buying the machine, and the [Seller] stopped providing warranty services since the beginning of August 2005, it severely violated business principles and breached the Contract. According to the [Seller]'s promise to its customers, the [Seller] shall continue to perform warranty services for six months, and shall also compensate the [Buyer] for any loss incurred during the stoppage of warranty services; the loss shall be 44,574 Euro, computed by the amount of 1,092,500 Euro which is paid by the [Buyer] at the bank's loan rate of the same time. Pursuant to the Memorandum, the [Seller] shall compensate the [Buyer] 15 rollers, and shall also compensate the [Buyer] RMB 105,100 for the purchase of the ultra-violet bulbs in order to mitigate damages. Therefore, the [Buyer] requests the Arbitration Tribunal to sustain its counterclaim.

THE ARBITRATION TRIBUNAL'S OPINION

(1) Applicable law and main issues in disputes

Article 15 of the Contract signed by the [Seller] and the [Buyer] on 26 April 2004 states:

" The applicable law is the law of the People's Republic of China, and may also refer to the United Nations Convention on Contracts for International Sales of Goods ('CISG") and international trade customs."

According to the parties' stipulation, the Arbitration Tribunal decides that the applicable law is Chinese law, and if Chinese law does not prescribe some matters, the CISG and international trade customs may be referred to. The parties signed the Contract on 26 April 2004 stipulating that the [Buyer] purchases a CD102-5 five-color printing machine for the total price of 1,146,550 Euro. Thereafter, the parties signed an Amendment to change the contract price to 1,150,000 Euro. The [Seller] has delivered the goods to the [Buyer], and the [Buyer] refuses to pay the balance, i.e., 5% of the contract price by alleging that the [Seller] stopped warranty services and the machine incurred technical problems.

The Arbitration Tribunal holds that the three main issues in dispute are:

   -    When is the condition for payment of the 5% satisfied?
   -    Warranty issues; and
   -    Liabilities of the parties.

These issues are addressed as follows:

(2) When is the condition for payment of the 5% satisfied?

The Arbitration Tribunal verifies the following facts:

On 26 April 2004, the [Seller] and the [Buyer] entered into their Contract stipulating that the [Buyer] will purchase a set of CD102-5 five-color printing machine from the [Seller]; the shipping time is before 15 September 2004. The Condition of Payment is that the [Buyer] issue an irrevocable letter of credit [L/C] with the [Seller] as beneficiary for 100% of the contract price before 29 April 2004; the [Seller] shall negotiate 95% of the contract price by presenting documents stipulated in Article 4 of the Contract, and the remaining 5% of the contract price shall be paid immediately after the Service Report is signed. The Arbitration Tribunal notes that the two Service Reports (No. KA002654 and No. KA002655) signed on 13 January 2005 state:

"1. The machine shall be adjusted by the [Seller]'s standards, and the staffs shall receive training with respect to operation and maintaining;

2. As per the customer's request, the machine was tested to print UV and PET material; US products have not been tested, but will be tested after the lunar New Year at the customer's request, and the time will be scheduled by the customer;

3. The machine is running normally, and the warranty period starts from 25 February 2005."

However, after signing the Service Reports, the [Buyer] did not pay the 5% of the contract price. The [Buyer] does not dispute this fact. The [Buyer] alleged that it did not make the payment because the [Seller] failed to pay the penalty of 6,900 Euro and deliver 15 rollers as stipulated in the Memorandum of 25 October 2005. The Arbitration Tribunal holds that the Contract definitely stipulates the payment condition, and the [Buyer] shall pay the 5% of the contract price immediately after the parties signed the Service Reports. Although the Service Reports were signed on 13 January 2005, they state that the warranty period starts from 25 February 2005; the [Seller] also confirms that the machine was completed adjusted and tested on 25 February 2005. The [Buyer] does not object to this allegation. Accordingly, the [Buyer] shall pay the balance from 25 February 2005.

Thereafter, the parties signed a Memorandum on 25 October 2005, and reached an agreement regarding the 5% of the contract price, i.e., the [Buyer] shall pay the balance first, and thereafter, the [Seller] shall deliver 15 rollers for free and pay a penalty of 6,900 to the [Buyer]. As to the characteristics of the Memorandum, the Arbitration Tribunal holds that it is the parties' true intent with their seals on it, therefore, it is binding on both parties. Although the [Seller] objected to its validity and contents, the [Seller] admits its authenticity. The Arbitration Tribunal holds that the Memorandum changes the condition for payment of the balance, i.e., the [Buyer] shall pay 5% of the contract price first without any precondition, and the condition of payment of 5% of the contract price was satisfied after the Memorandum was signed. The [Buyer] failed to pay the balance, and breached the Contract, and therefore, it shall be liable for the breach.

(3) Warranty issues

The Arbitration Tribunal notes that Article 8 of the Contract stipulates that the warranty period is twelve months from the date the [Seller] signs the Service Report. The warranty services include replacing any broken parts and fixing the problems, but are limited to defects which occur during the normal operation of the machine. Service Report No. KA002655 signed by the parties on 13 January 2005 specifies that the warranty period starts from 25 February 2005. Accordingly, the Arbitration Tribunal verified that the [Seller] was obligated to provide warranty services from 25 February 2005 to 25 February 2006.

The [Buyer] alleged that there were many problems with the machine during the warranty period and that it had requested the [Seller] to repair the machine; however, the problems have not been resolved, and the machine cannot be used at all. The [Buyer] submitted five faxes and photos to sustain its allegations. The [Seller] does not admit the authenticity of the [Buyer]'s evidence.

After comparing the evidence submitted by each party and considering the parties' answers in the hearing, the Arbitration Tribunal holds that although the [Seller] does not admit the authenticity of the [Buyer]'s evidence and alleges that it has never received the five faxes, photos and Ultra-Violet Ray Invoice, it admitted that it provided maintenance services at the [Buyer]'s site on 11 August 2005. Service Report No. 502954 submitted by the [Seller] states:

"1. We maintained the IST equipment of the machine, and the machine is running normally;
"2. No. 9, 10 and 12 rollers have defects ..."

The Arbitration Tribunal compared Service Reports No. 501191, 502742, 002150, 002151 and 002149 submitted by the [Buyer]. The parties do not object to the authenticity of all Service Reports. The Service Reports prove that before 11 August 2005, the [Seller] performed its duty of warranty under the Contract, and they also prove that the machine has defects. Thereafter, the [Buyer] alleged that it had requested the [Seller] to provide warranty service via telephone and fax, but the [Seller] alleged that it has not received any objection to the quality of the machine from the [Buyer]. The Arbitration Tribunal holds that although the [Seller] denied the authenticity of the faxes submitted by the [Buyer], the [Buyer] submitted a copy of an express mail tracking slip which indicates that the [Seller] received the [Buyer]'s demand letter dated 17 February 2006, the content of which is the same with that in the fax. The [Seller] does not deny its receipt of the [Buyer]'s demand letter. Although the [Seller] has a different understanding as to content of the demand letter, the Arbitration Tribunal has sufficient reasons to believe that the [Seller]'s warranty services provided to the [Buyer] from 11 August 2005 to 17 February 2006 were not satisfactory, which is known clearly by the [Seller]. The [Buyer]'s demand letter was sent within the warranty period. However, the [Seller] did not respond to the demand letter. The Arbitration Tribunal holds that the [Seller]'s non-performance was defective performance, therefore shall be held liable at this point.

(4) The parties' liabilities

As stated above, according to Article 6 of the Contract, the [Buyer] shall pay 5% of the Contract price after the Service Reports were signed. However, the Memorandum signed by the parties on 25 October 2005 stipulates that the [Buyer] shall pay 5% of the Contract price first. The Arbitration Tribunal holds that the Memorandum is valid and binding on both parties. Nevertheless, after signing the Memorandum, the [Buyer] failed to pay the balance, and shall be liable for its breach.

However, the [Seller] had only provided warranty services for half a year. Although the [Seller] denied that it received the [Buyer]'s requests for warranty services after the last Service Reports were signed on 15 August 2005, the Arbitration Tribunal holds that the [Seller] knew the problems of the machine during the warranty period, but failed to communicate with the [Buyer] to take remedial measures. Obviously, the [Seller] breached the Contract and shall be liable for the breach. The [Buyer] submitted an On Site Inspection and Verification Application to the Arbitration Tribunal on 10 May 2006. However, the Arbitration Tribunal holds that the evidentiary material and other written opinions submitted by the parties are sufficient to decide the [Seller]'s defective performance, and it is not necessary to inspect the machine.

The Arbitration Tribunal holds that the [Buyer] bears more liability than the [Seller].

(5) The [Seller]'s claims

The [Seller] requests the following relief:

1.  The [Buyer] shall pay the [Seller] the balance of the contract price, i.e., 57,500 Euro, and shall also pay liquidated damages accrued from 25 February 2005 to the date when the payment is made, at the rate that the People's Bank of China stipulates for delayed payment of loan at the same time, i.e., 2.1/10,000, and the liquidated damages are 3,719.10 Euro as of 25 December 2005. Therefore, the [Buyer] shall pay the total amount of 6,121.91 Euro;
 
2.  The [Buyer] shall compensate the [Seller] for the reasonable expenses in the amount of RMB 59,382.43 (i.e., 10% of 61,219.10 Euro), which was incurred for the present case, equaling to 6,121.91 Euro (at the exchange rate of 9.7 : 1);

The total amount of the above Items 1 and 2 is 67,340 Euro;
 

3.  The [Buyer] shall bear the arbitration fee.

The Arbitration Tribunal holds that:

The [Buyer] shall pay the [Seller] the balance of 57,500 Euro. As to the request for liquidated damages, the Arbitration Tribunal holds that since the [Buyer] also breached the Contract and conducted defective performance, the request for liquidated damages is not sustained. With respect to the request for reasonable expenses, since the [Seller] does not submit any evidence to support this request, the Arbitration Tribunal does not sustain the request for reasonable expenses.

As to the arbitration fee, considering each party's degree of breach of the Contract, the Arbitration Tribunal holds that the [Seller] shall pay 30% of the arbitration fee, and the [Buyer] shall pay 70%, i.e., 4,057 US $ * 30% = 1,217 US $, and 4,057 US $ * 70% = 2,840 US $.

(6) The [Buyer]'s counterclaim

The [Buyer] counter requested the following relief:

1.  The [Seller] shall continue to perform its duty of warranty for six months, fix the machine immediately, and replace the defective parts including those described above;
 
2.  The [Seller] shall compensate the [Buyer] for damages in the amount of 44,574 Euro (computed based on the same time bank loan rate) which was caused by the [Seller]'s stoppage of warranty service;
 
3.  The [Seller] shall deliver fifteen UV rollers to the [Buyer], and shall pay a penalty in the amount of 6,900 Euro for delayed delivery;
 
4.  The [Seller] shall compensate the [Buyer] for expenses in the amount of 5,100 Euro reasonably incurred for this case;
5.  The [Seller] shall bear the arbitration fee.

The Arbitration Tribunal holds that:

The [Buyer]'s request to prolong three months of the warranty period is reasonable. If the [Seller] fails to perform its duty during the prolonged warranty period, the [Buyer] is entitled to take other measures to fix the problems and the [Seller] shall bear the expenses duly incurred thereof.

To support the [Buyer]'s request for compensation of loss in the amount of 44,574 Euro, the [Buyer] submitted ten copies of Ultra-Violet Bulb Invoices, but the [Seller] objects to the authenticity of these invoices. The Arbitration Tribunal holds that these ten invoices cannot prove that the ultra-violet bulbs were purchased for the machine, and cannot indicate the relationship between the ultra-violet bulbs purchase and the [Seller]'s warranty duty. Therefore, the Arbitration Tribunal does not sustain this request.

As to the request for 15 rollers and payment of penalty in the amount of 6,900 Euro, the Arbitration Tribunal holds that the parties signed a valid Memorandum on 25 October 2005, which is the parties' true intent, and it specifies the parties' rights and obligations. The parties shall perform the duties stipulated in the Memorandum. Considering the [Seller]'s request that the [Buyer] shall pay 5% of the contract price is sustained, the Arbitration Tribunal holds that the Memorandum stipulates the order of performance, and therefore, the [Seller] shall deliver 15 rollers and pay the penalty of 6,900 after the [Buyer] pays 5% of the contract price to the [Seller].

As to the request for reasonable expenses, the Arbitration Tribunal holds that the [Buyer] did not submit any evidence to indicate that the expenses were really incurred; therefore, the Arbitration Tribunal does not sustain this request.

With respect to the arbitration fee for the counterclaim, the Arbitration Tribunal holds that the [Buyer] shall bear 80%, and the [Seller] shall bear 20%, which computed as follows: 41,405 RMB * 80% = 33,124 RMB; and 41,405 RMB * 20% = 8,281 RMB.

AWARD

(1)   The [Buyer] shall pay the [Seller] the balance of 57,500 Euro;
 
(2)   The [Seller]'s other claims are dismissed;
(3)   The [Seller] shall provide additional three-month warranty services to the [Buyer], and the additional warranty period will start when this award takes effect;
(4)   The [Seller] shall deliver 15 rollers and pay the penalty of 6,900 Euro to the [Buyer] within 30 days after the [Buyer] pays the 57,500 Euro;
 
(5)   The [Buyer]'s other counterclaims are dismissed;
 
(6)   The arbitration fee for the [Seller]'s claims is US 44,057, of which the [Seller] shall bear 30%, i.e., US $1,217, and the [Buyer] shall bear 70%, i.e., US $2,840. The arbitration fee is offset by the [Seller]'s prepayment of US $4,057. And therefore, the [Buyer] shall pay the [Seller] US $2,840;
 
(7)   The arbitration fee for the [Buyer]'s counterclaims is 41,405 RMB, of which the [Seller] shall bear 20%, i.e., 8,281 RMB, and the [Buyer] shall bear 80%, i.e., 31,324 RMB. The arbitration fee is offset by the [Seller]'s prepayment of 41,405 RMB. And therefore, the [Buyer] shall pay the [Seller] US $2,840.

The above items (1), (5) and (6) shall be paid within 30 days after this award takes effect; otherwise, the penalty at the rate of the delayed payment standards of the People's Bank of China shall be added.

This award is final and shall take effect upon adjudication.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant believed to be of Germany is referred to as [Seller]; Respondent of the People's Republic of China is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $]; amounts in the currency of the People's Republic of China (renminbi) are indicated as [RMB].

** Zheng Xie, LL.M. Washington University in St. Louis, LL.M., BA in Economics, University of International Business and Economics, Beijing.

*** Wang Minna, Tsingua University representative in the "Fifteenth Annual Willem C. Vis International Commercial Arbitration Moot" in 2008 (Counsel for both sides); Third Place in "Fifth Annual CIETAC International Commercial Arbitration Moot" in 2007 (Counsel for Respondent).

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Pace Law School Institute of International Commercial Law - Last updated October 21, 2009
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